Application of capitals to Integrated Reporting <IR> explored in new background paper

Global 3 Apr 2013

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Although companies depend on the six capitals to different extents, collectively these capitals affect the long term survival of any company and influence its value creation. Reporting on them is therefore a crucial element in future corporate reporting and will be necessary to meet stakeholders’ expectations

—Rachel Jackson, head of sustainability,ACCA

Capitals - from human to intellectual - seen as important for viability of an organization’s business model

The current and future application of capitals in Integrated Reporting <IR> are explained today in a new report prepared for the IIRC (International Integrated Reporting Council) by a group led by ACCA (the Association of Chartered Certified Accountants) and the Netherlands Institute of Chartered Accountants (NBA).

The Background Paper for <IR> explores the multiple capitals that are recognised as a fundamental concept for <IR>. The IIRC has identified capitals as financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital.

When reported together, these capitals represent an important picture of an organization’s value creation. All organizations depend on various forms of capital for their success, including ones they do not own, and the different capitals should be part of the organization’s business model and strategy.

The Paper is being issued ahead of the IIRC’s global consultation about the future of <IR>, due to be published on the 16 April 2013. The report provides a sound basis for the role of capitals in the <IR> Framework, suggests new proposals for improving the categorisation and descriptions of capitals adopted by the IIRC and provides more background to what may be unfamiliar concepts to help in their practical application.

Rachel Jackson, head of sustainability at ACCA and a member of the steering group for this Paper, says: 'Although companies depend on the six capitals to different extents, collectively these capitals affect the long term survival of any company and influence its value creation. Reporting on them is therefore a crucial element in future corporate reporting and will be necessary to meet stakeholders' expectations.'

Dr Andrea Coulson, from the University of Strathclyde, Chair of ACCA’s Global Forum on Sustainability and a member of the project team adds: 'Exploring the concept of multiple capitals; their definition, relationships and maintenance is critical to an inclusive debate on developments in <IR>.'

Dr Carol Adams, Director at Integrated Horizons, and also a member of the project team, says: 'CFOs and Boards have tended to privilege information which can be quantified, focus on the short term and ignore the impact that value creation and depletion of some of the capitals can have on long term business success. All that must change for organisations that want to be around in the long term.'

The report concludes that there is a need to place capitals in a strategic context, which is a prime need for investors who make their investment decisions based on material about a company available to them.

Richard Martin, head of corporate reporting at ACCA concludes: 'The key point about <IR> is to communicate value, giving a broader explanation of performance than traditional reporting, and identifying and reporting on capitals, either via metrics or being part of the narrative.'